Turning to Value Amid Challenging Markets

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  • 07 mins 15 secs
Investors have had a long year with global markets at considerable lows as we march into the holidays. Interest rates, inflation, and volatility remain headlines challenging investors. Henry F. Otto, Founder and Co-lead Portfolio Manager of the Diversified Value Equity Strategies at Brandywine Global, shares his perspective on the state of growth vs value investing and why investors should look to value to help solve these challenges. He also discusses the benefits of active management and the mutual fund to ETF conversion of the Brandywine GLOBAL-Dynamic US Large Cap Value ETF, DVAL.
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Jenna Dagenhart: Hello and welcome to The ETF Show. Joining us now to talk about value investing is Henry Otto, Founder and Co-lead Portfolio Manager of the Diversified Value Equity Strategies at Brandywine Global, which is a specialist investment manager of Franklin Templeton. Henry, great to have you with us.

Henry F. Otto: Thank you, Jenna. Great to be here.

Jenna Dagenhart: So let's start, Henry, with why now? Investors have had a long year with global markets at considerable lows as we march into the holidays. Interest rates, inflation, and volatility remain headlines challenging investors. Could you share your perspective on the state of growth versus value investing, and why investors should look to value to help solve some of these challenges?

Henry F. Otto: Certainly, and first of all, let me say that we believe that the current very challenging environment does favor value investing. Now, after a long stretch of dominance by growth stocks, value stocks began to outperform in late 2022. Despite that, the valuation for growth stocks relative to value stocks, as measured by the price to book of the Russell 1000 value versus the Russell 1000 growth is still as high and overextended as it was back in 2000 at the peak of the tech bubble. And as we've seen over the last decade, that level of extended valuation can go on for quite a long time period. However, now we see a powerful catalyst to bring relative valuations back down to normal levels.

Growth stocks are distinguished by higher expected future earnings, so they perform best when interest rates are low and market uncertainty is low. That is exactly the environment that we've experienced over the last decade. The Fed kept interest rates low, very low, and provided heavy monetary stimulus every time there was a market downdraft, and that was very good for growth stocks. But now the Fed has to pivot to fight inflation. Interest rates are rising and unlikely to go back to the same level as they were over the last decade, and the Fed cannot return to an expansionary policy every time the market goes down. As a result, the high interest rates, the inflation, the volatility you mentioned recently have benefited value stocks, and we think these factors should continue to help value stocks do better than growth stocks going forward.

Jenna Dagenhart: Of course, Henry, US equity reigns as a core holding commanding the largest portion of most US investor portfolios. Many clients have looked to cheap index tracking beta. Could you share your thoughts on active management and your approach and how that's important for this exposure?

Henry F. Otto: Sure. Despite the movement toward index-based investing, we at Brandywine and Franklin Templeton are steadfast believers in the long-term effectiveness of active management. At Brandywine across our suite of equity and fixed income strategies, we have a long history of strong outperformance versus these passive indices. The BrandywineGLOBAL Dynamic US Large Cap Value ETF, ticker symbol DVAL, is based on one of these strategies. We have offered this quantitative large cap value product to our institutional clients with over 15 years of significant outperformance versus passive value investing. One key source of this consistency is our proprietary market evaluation tool that enables our strategy to emphasize the different aspects of value investing that perform best in the current equity market environment. This tool switches our investments between what we refer to as our broad and deep value investment models. So for instance, in mid-2020, as the market recovered from the initial pandemic decline, our strategy switched us to the deep value model, and that took advantage of that strong initial value rally in late 2020.

Finally, all of our investment decision in this portfolio are driven by quantitative models. We rigorously tested these models over various historical market cycles to study their performance in different market environments, and the result of this testing process is an investment approach designed to provide strong results with that greater consistency through the market cycle. We also think that our quantitative investing style is particularly well suited to the current turbulent markets because the quantitative discipline insulates our investing from the charged emotions that are just part of this ongoing market uncertainty.

Jenna Dagenhart:Finally, Henry, I want to get your thoughts on why DVAL, the BrandywineGLOBAL Dynamic US Large Cap Value ETF, DVAL was recently converted from a mutual fund to an ETF. Could you share why you converted, and why should investors consider DVAL?

Henry F. Otto: Sure. Franklin Templeton is responding to the obvious growing client demand for ETFs, and we're broadening our lineup to include additional active strategic offerings in US large cap value, and that's the portfolio DVAL that we're managing, as well as an international growth space. We believe our active management adds value, particularly in markets turbulent like these we are in today. And for active ETFs, we believe that strong management teams and strong track records matter very much to clients, and that's what makes these active ETFs attractive.

 As I mentioned, DVAL carries a 15-year track record from our diversified equity team. We have six PMs and two analysts that have an average of 25-years plus of experience in the equity markets and at Brandywine managing these kind of portfolios, this track record and our overall market expertise bolster our belief that we have the ability to exploit market opportunities based on enduring investor behavioral biases.

And to emphasize, again, we think that now is a good time both for value investing and for the discipline repeatable approach that we can now bring to the ETF audience through DVAL.

Jenna Dagenhart: Well, Henry, thank you so much for joining us.

Henry F. Otto:  Thank you for the opportunity to speak to you today.

Jenna Dagenhart: And thank you for watching. Once again, that was Henry Otto, portfolio manager of the newly launched ETF, DVAL, and I'm your host, Jenna Dagenhart with Asset TV.

 

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